Vietnam's swine sector: Challenged, impressive but in need of much additional improvement

A decade-long slump in Vietnamese pork's once-rapid growth is bottoming out. As consolidation quickens, so will productivity growth and demand for swine supply chain capital goods.

By Eric J. Brooks

An eFeedLink Hot Topic

If one adjusts for its smaller population and decade lag in economic growth, Vietnam's swine sector is a dynamic, miniature version of China's obsession with all things pork. Based on USDA figures, from 10kg in 1995, Vietnam's per capita pork consumption jumped to 20kg by 2005, 27.8kg by 2015 and a projected 29kg in 2018.

This year, a combination of disease outbreaks and price deflation caused by China's dramatic slashing of Vietnamese live hog imports has upset forecasts. The end of China's pig import binge resulted in hog prices falling up to 40% at one point.

Alongside high feed costs and pig disease outbreaks in early 2017, this devastated returns and the incentive to keep pigs. According to Nguyễn Kim Đoán, vice chairman of Đồng Nai Poultry Association, "40% of small-scale big breeders, amounting to tens of thousands of households, have gone bankrupt" -and new government legislation could see comparably large numbers exit hog farming in 2018.

Thus, after peaking near 30 million head, the Ministry of Agriculture and Rural Development (MARD) estimates that September 2017 hog numbers were down nearly a tenth from a year earlier. Inventories are expected to have started 2018 at slightly over 27 million pigs.

While the current troubles caused heavy losses and many small-scale farmers to abandon swine rearing over the short-term, there is also a deeper, long-term issue developing: -As was the case with China, as soon as its pork consumption rises to world-leading levels, Vietnam's swine sector hit a wall of supply-side constraints.

These challenges are compounded by a paucity of reliable statistical data and geographic consumption disparities. For example, per capita consumption estimates range from as low as 20kg in private analyst report from 2015 to 35Kg implied by government statistics.

What we are sure of is that Vietnam's per capita pork consumption currently exceeds US levels and will one day probably equal that of China or Germany. For this article, we have divided USDA estimates of Vietnamese domestic pork consumption by its population, which implies 2017 per capita pork consumption exceeded 28.5kg. What is most amazing is that with a per capita GDP of less than US$3,000/year, vast increases in consumption occurred even though Vietnam has some of the world's highest pork prices.

While there is no agreement on consumption levels, most studies show urban residents eating up to 50% more pork per capita (42kg, based on USDA figures) than the national average and more than twice the amount consumed by rural residents (16kg to 20kg). Even so, the greatest challenges are those pertaining to supply, not demand.

In land scarce Southeast Asia, Vietnamese are among the developing world's most red meat hungry consumers. Given its similar Buddhist, Confucian-influenced, meat-agnostic culture, it is possible that by 2030, Vietnamese will be eating the same 40kg of pork per capita that China's people do today.

Unfortunately, the 8% annual growth for 2016-2020 predicted by the World Bank simply isn't happening. 2017 saw pork output rise a mere 1.8% (to 2.75 million tonnes) and it projects only 1% growth (to 2.80 million tonnes) for 2018. -Over the longer term, after expanding by an average of 8% annually from 1995 through 2010, the past seven years have seen Vietnam's pork production grow by a much slower 3% annual rate.

This was partly due to two recessions in the last ten years when temporary drops in consumer purchasing power coincided with disease outbreaks. According to an IPSOS Report, "FMD, PRRS, porcine high fever disease and others from 2006-10 caused devastating losses to the Vietnamese swine sector and raised extreme concern among consumers." Towards the end of this period, disease problems tapered off but resurfaced in 2015 and again in 2017.

Even so, the bigger constraint is one of inputs: That a red meat like pork would strain a resource-poor country like Vietnam is not surprising. On one hand, it is not surprising that hogs eat up approximately 80% of Vietnam's livestock feed and almost 75% of its total feed production.

On the other hand, we are presented with an interesting discrepancy of sorts: From 2010 through 2017, Vietnam's pork production (which used up over 70% of feed) went up a 23%. Its combined beef and chicken production (which eat up another 20% of feed) rose by 51% over this time. Even with aquaculture (which uses less than a tenth of feed) expanding by nearly 10% annually, all this cannot account for Vietnam's feed production doubling in just six years, from an Alltech estimated 8.9 million tonnes in 2011 to 19 million tonnes by 2017.

With pork accounting for the overwhelming share of national protein production, the doubling of feed production (most of which is consumed by pigs) over a five year period when pork production rises by less than 25% and total protein production by under 45% requires explaining.

The answer to this apparent contradiction between Vietnam's skyrocketing feed output and slower growing meat production can be found in restructuring and rapidly rising hog productivity -though the latter still has a very long way to go.

In a nutshell, Vietnam is feeding roughly the same number of pigs to much higher finishing weights than before. Moreover, with over a third of pork production being transferred from small producers to large-scale farms, pigs were more than fed to higher finishing weights. Furthermore, not only are those pigs eating more than before, many of them are eating real feed made from corn and soy, whereas a decade earlier, they would have been fed farm scraps. Hence, the disproportionate rise in feed production relative to pork output.

The bad news is that low productivity starts at the very start of swine production: According to figures from MARD, the proportion of the hog inventories accounted by sows is over 14%. This is much higher than the 8% to 9% found in advanced countries. It reflects both fertility problems and a relatively low number of piglets produced per sow litter.

An average Vietnamese sow produces 12 to13 piglets per sow/year compared to up to 30 piglets per sow/year in America. -Even here, however, we see many discrepancies: Numbering approximately 10,000 and supplying 15% to 20% of Vietnam's pork, modern integrated farms (which account for a minority of output) achieve over 20piglets/year from every sow.

By comparison, backyard farms provide over 80% of the nation's pork but usually do not achieve more than seven or eight piglets per litter. In a country where 60% of the population is rural, the average backyard hog herd consists of 20 to 25 pigs, of which one to five are sows.

Over the past year, these traditional, small-scale producers have suffered catastrophic losses. MARD estimates that 2017 saw the number of pig breeding households plunge by a whopping third, with 800,000 to 900,000 of them exiting swine farming. While that creates unemployment and social problems, the resulting supply vacuum will eventually be filled by more efficient, larger-scale farms.

From less than 10% a decade ago, such enterprises now supply 40% of Vietnam's pork (though only a quarter of its hogs). They are already making an impact on Vietnamese swine's productivity fundamentals.

Indeed, the size of Vietnam's hog herd tells the story of rising productivity better than any other indicator. As the accompanying graph shows, from the late 1990s through the mid-2000s, hog inventories rose steeply. From 1996 through 2005 inclusive, a 64% increase in hog inventories (from 16.7 million to 27.4 million) helped boost hog production by 112%, from a USDA estimated 788,000 tonnes to 1.67 million tonnes).

Thereafter, the proportional relationship between hog inventories and pork production broke down. In the next twelve years, pork production rose another 65%, to approximately 2.75 million tonnes in 2017 -Even so, Vietnam's 2017 closing hog inventory of 27 million was no higher than it was at the end of 2005.

Granted, from 2014 to 2016, there as 10% spike in hog inventories to nearly 30 million head -but that was entirely due to hogs that were exported to China- and when China no longer needed to import Vietnamese pigs, both this inventory bubble and the industry's profitability burst in a rather dramatic way.

But if one filters out the mid-decade hog export boom from these statistics, something else becomes apparent: Over the course of approximately 12 years, Vietnam managed to produce 65% more pork in the face of near 0% hog population growth. That means that hog carcass yields have been increasing by 4% annually since 2005. While this is impressive, a comparison with international standards shows that the industry still has a long way to go.

In 2005, average hog carcass weight was under 50kg. MARD statistics indicate that average hog carcasses weight increased to 67.1kg for 2011 and approximately 70kg by 2017. By comparison, a German pig's hog carcass weight of 104kg yields nearly 50% more pork from each hog slaughtered.

This 'average' finishing weight also hides that fully grown hogs at large scale farms weigh in around 90kg and can be expected to approach 100kg by the mid-2020s. As integrator hog finishing weights increase and their share of swine production rises, average national hog finishing weights will rise along with them.

At the same time, Vietnam's swine sector is facing more than one serious challenge: Livestock supplements such as AGPs have been overused in ways that compromise both human and animal health. In response to this problem, at the beginning of 2018, Vietnam's government banned AGPs in all types of swine feed except that intended for piglets. It will follow by banning antibiotics for disease prevention from piglet feed rations in 2021.

Over the short term, this will have the same impact on Vietnam's hog production as strict new environmental controls did in China. Small-scale, undercapitalized farms lack the financial resources, technical expertise and land area to raise animals without resorting to AGPs and other additives that cause health and food safety concerns.

The net result will be to cause Vietnam's remaining backyard farms to leave the industry. Together with the large losses incurred over the last 18 months, the consolidation of Vietnamese swine production into fewer, larger scale farms is now starting to run ahead of schedule.

The short-term cost however, will probably be another year or two of depressed, below trend growth in pork production.

The good news is that after 2018, pork production could resume expanding at a 4% to 5% annual rate by the early 2020s. The past year's swine sector recession, while brutal, will leave a majority of hog and pork production in the hands of well-capitalized, technologically competent producers by the early 2020s.

For western suppliers, emerging Vietnamese pork producers will become an important fast-growing market of end-to-end supply chain capital goods. A new generation of large-scale hog farms will accelerate national spending on swine genetics. As the rearing of millions of hogs is transferred from backyard farms to large-scale facilities, new management will replace farm scraps with corn and soy-based feed inputs.

To maintain pork production in the face of the new ban on AGPs and impending ban on preventative antibiotics, Vietnamese hog integrators will need to become major buyers of western plant, yeast and acidifier-based natural growth promoters. With most Vietnamese still getting their pork freshly slaughtered, the replacement of countless wet markets with centralized, automated slaughterhouses and processing equipment will lead to huge imports of meat processing capital goods.

Thus, while it will be an exciting time for Vietnamese pig farmers, the opportunities will be even greater and more expansive for suppliers of swine supply chain technology, supplements, trace minerals and capital goods.

All rights reserved. No part of the report may be reproduced without permission from eFeedLink.